Malaysian Prime Minister Najib Razak is facing a challenge from one of the country's former leaders, as his administration tries to fend off allegations of corruption over misusing a multi-billion dollar development fund.

Former leader Mahathir Mohammad, who served as prime minister from 1981 to 2003, has left the ruling United Malays National Organisation (UNMO) party and created a new political party aimed at uniting opposition to Najib Razak's leadership.

The party, Parti Pribumi Bersatu Malaysia, or Bersatu (United), is led by a former UMNO deputy prime minister, Muhyiddin Yassin, who himself was sacked by Prime Minister Najib after Muhyiddin challenged him over his role in the state owned 1 Malaysia Development Berhad (1MDB) fund.

Investigations in Singapore and the United States, through the U.S. Department of Justice, have focused on charges that over $3.5 billion had been diverted from the 1MDB fund that Najib set up in 2009. The revelation has caused a political firestorm in Malaysia, but the prime minister has so far been able to outmaneuver challengers looking to unseat him for his role in the controversy.

The prime minister claims he is innocent saying the funds were properly used and were a "genuine donation" from Saudi Arabia.

Malaysia has been ruled by the United Malaya National Organization (UMNO) led coalition – Barisan National -- since elections after independence in 1959. Mahathir dominated Malaysia’s political landscape until he stepped down in 2003.

But in the past year as the IMDB controversy unfolded, Mahathir publicly called for the prime minister to step aside. When Mahathir was unable to convince the UMNO party to oppose Najib, Mahathir then quit the UMNO, leading him to back an opposition party.

William Case, a political scientist at City University in Hong Kong, says Mahathir’s move increases pressure against Najib.

“It is interesting at least that the former Prime Minister (Mahathir) has taken this next step. He began with something called ‘Citizens’ Declaration’, and then morphed into the ‘Save Malaysia Movement’ and yet he’s gone on and he is instrumental in the founding of a new opposition party – indeed if it is finally registered,” Case said.

The Bersatu (United) party has been endorsed by Anwar Ibrahim, the imprisoned de facto leader of Malaysia’s opposition, currently facing a five year jail term for sodomy -- charges supporters say were politically motivated. The party has also drawn support from the pro-Malaya Chinese Democratic Action Party (DAP) -- which Mahathir has sharply criticized in the past as being anti-Islam and anti-Malay.

“Many of these people in [Bersatu] are all UMNO members – they have jumped ship but they come with a certain mindset – and that mindset is a very ethnic mindset. So they are trying to reframe or recreate the Barisan National [coalition],” Aeria said. The professor said whether the party can overcome those differences remains to be seen.

In the meantime, Prime Minister Najib is facing several international challenges over the alleged misuse of the development funds. In the United States civil lawsuits hope to seize $1 billion of assets from the 1MDB fund that were transferred into the U.S. through shell companies.

But analysts say Najib still remains confident of weathering any international investigations with the help of key supporters, including the governor of the central bank.

James Chin, director of the Asia Institute at the University of Tasmania in Australia, says the international investigations pose bigger problems for Najib than his political opponents at home.

“My take is it’s not going to be a threat to [Mr] Najib for the simple reason, if you look at recent political history there has been similar attempts when a senior UMNO person has come up and established a similar party to try to challenge UMNO. Both of them were not successful and I suspect Mahathir’s Party will along the same path – that he will not be successful,” Chin said.

Malaysia is slated for new elections by 2018. But analysts say Prime Minister Najib may look to call snap polls sooner, and as the best-funded candidate who retains the backing of the powerful ruling party, he is likely positioned to keep his leadership post, despite the ongoing controversy.